“The decision was widely anticipated. However where we go from here may not be as clear cut as the city is predicting.”
Boulger continues, “ The City’s view is that the Base Rate will rise to 5.25% by the end of 2004 but this could well turn out to be on the high side. There are plenty of arguments against a further 1.5% rise in the next 12 months. The manufacturing economy is still weak and sterling is strong. The challenge is to slow the growth in borrowing without undermining the economy.
“The Eurozone is still in the doldrums and the US looks set to keep rates low for some time to come. Whilst the MPC’s ability to set interest rates appropriate to the UK has been, and will continue to be, crucial to keeping our economy on an even keel, in today’s global market place the level of interest rates in other major economies can’t be ignored. The Bank is unlikely to stray too far from the US or Europe.
“There will be many commentators raising concerns that this rise will have a negative impact on the housing market. While we continue to believe that house price inflation will slow, a quarter point rise is likely to have little or no material effect on the state of the housing market, so fundamentally nothing has changed. Despite today’s quarter point rise to 3.75%, interest rates are still at a near fifty year low and it is important that homeowners and borrowers keep today’s rate rise in context and don’t panic.
What should borrowers do now?
“Swap rates, which are what lenders base their fixed rate pricing on, started factoring in an increase in Base Rate as early as late July. We now have the widest gap between market leading fixes and discounts/trackers for some considerable time so that fixed rate deals now look expensive when compared to flexible discount and tracker loans. Whilst today’s Base Rate rise will mean those on discount/tracker deals will be paying more next month, the Base Rate would have to rise by over 1_% to at least 5% before pay rates on the best discount and tracker mortgages exceeds those on the fixed rates of four or five years or longer.”
Boulger concludes, “Our advice is that those who can should plump for a flexible discount/tracker mortgage and over pay now while rates are still historically low in order to pay off more of their mortgage debt.
“However, there will always be people who want the security of fixed monthly payments. First time buyers and anyone on a tight budget should still consider fixed loans and anyone who can’t afford their mortgage at a rate of at least 5% probably shouldn’t buy the property.”
